Profit margin and markup are two different accounting terms that use the same inputs and analyze the same transaction, yet they show different information.
The difference between profit margin and markup is that profit margin is sales minus the cost of goods sold; meanwhile, markup is the amount by which the cost is increased on a product to arrive at the selling price.
For example, if a company earned $3,000 in revenue and the cost to produce it was $1,000, the gross profit would be $2,000 and the gross profit margin would be 66.6% ($3,000 – $1,000) / ($3,000).
Markup is the retail price a product minus its selling price, but the margin percentage is calculated differently.
In our earlier example, the markup is the same as the gross profit, or $2,000, because the selling price was $3,000 and the cost was $1,000 to produce. However, the markup percentage is shown as a percentage of the cost as opposed to a percentage of revenue with gross margin.
For example, using the same numbers as the example above, the markup percentage would be equal to ($3,000 - $1,000) / ($1,000), or 200%.
Profit margin and markup show two different sides of the transaction. The profit margin shows the profit as it relates to the selling price or the revenue generated, whereas the markup shows the profit as it relates to the cost amount.
Typically, markup determines how much money is being made on a specific item relative to its direct costs, whereas profit margin takes into consideration total revenues and total costs from various sources and various products.